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Monitoring Subcontracting in a Suppliers` Hierachy

Author

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  • Michela Cella
Abstract
In this paper we study the delegation of a production process in a three-tier hierarchy. The principal contracts directly only with the supplier that produces the first input leaving him in charge of the contract for the production of the second input. We allow the principal to costlessly monitor the communication between the agents at the subcontracting stage in an attempt to save on informational rents and improve productive efficiency. We show that, if the contractor is free to choose the type of subcontract, he must be given additional incentives to acquire information about the subcontractor which will then be the object of the monitoring. The monitoring is therefore much less effective then when the principal can force the contractor into choosing her preferred subcontract.

Suggested Citation

  • Michela Cella, 2005. "Monitoring Subcontracting in a Suppliers` Hierachy," Economics Series Working Papers 233, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:233
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    References listed on IDEAS

    as
    1. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-1797, November.
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    4. Faure-Grimaud, Antoine & Martimort, David, 2001. "On some agency costs of intermediated contracting," Economics Letters, Elsevier, vol. 71(1), pages 75-82, April.
    5. Jean-Jacques Laffont & David Martimort, 1998. "Collusion and Delegation," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 280-305, Summer.
    6. Baron, David P & Besanko, David, 1992. "Information, Control, and Organizational Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(2), pages 237-275, Summer.
    7. Antoine Faure-Grimaud & Jean-Jacques Laffont & David Martimort, 2003. "Collusion, Delegation and Supervision with Soft Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 253-279.
    8. Dilip Mookherjee & Masatoshi Tsumagari, 2004. "The Organization of Supplier Networks: Effects of Delegation and Intermediation," Econometrica, Econometric Society, vol. 72(4), pages 1179-1219, July.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Adverse Selection; Hierarchies; Delegation; Monitoring;
    All these keywords.

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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